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The Obama Administration’s bold agenda to establish these rules across Europe and the Asia-Pacific did not yield lasting success, with the failure of the Transatlantic Trade and Investment Partnership (TTIP) negotiations and the Trump Administration’s withdrawal from the Trans-Pacific Partnership (TPP). Nonetheless, the key elements of US digital trade policy enjoy bipartisan policy support, providing a promising basis for the next Democratic administration to re-engage with Europe, our biggest digital trading partner.

Part 1 of this issue brief explains why international rules are needed to protect and facilitate digital trade. Part 2 describes the turbulent past decade in transatlantic trade relations and the growing importance of US digital trade with Europe. Part 3 explains why the US government and the European Union (EU), during TTIP negotiations, were unable to agree on a digital trade chapter, including a key provision guaranteeing the free flow of data. Finally, Part 4 suggests how two parallel sets of trade negotiations beginning early this year — between the EU and the United Kingdom (UK) and between the United States and the UK — may help a future US Administration end the transatlantic stand-off over digital trade.

To view the full report at Progressive Policy Institute, please click here

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A recent easing of global trade tensions has not come without critical change involving two of the U.S.’s largest trade partners: Mexico and China.

Talks aimed at easing underlying trade policy differences between the U.S. and Mexico and the U.S. and China concluded earlier this year with two agreements. The United States–Mexico–Canada Agreement (USMCA) replaces the North American Free Trade Agreement (NAFTA), which had been in place since 1994. It sets a new framework for North American regional integration among the three nations.

The U.S.–China Phase One deal included Chinese pledges for the purchase of U.S. farm products, safeguards for intellectual property, and the promise of further talks to reduce trade frictions between the two nations. The trade dispute has included successive rounds of tariffs since early 2018.

Taken together, the two agreements present challenges and opportunities for Mexico, both in the short term and long term, with regard to how it will do business—including with Texas that counts its neighbor as its largest trading partner and as a key link in the production of intermediate and finished goods.

USMCA, while opening the possibility of further regional integration in areas such as digital commerce, is more restrictive than NAFTA in other sectors, such as the automotive sector, where lower Mexican output could adversely affect its gross domestic product (GDP). On the other hand, even with the latest agreement between the U.S. and China, ongoing policy differences between the two have prompted trade diversion toward Mexico, which has acquired an increasing share of the U.S. import market.

However, these positive effects of trade diversion may be short-lived and come with the cost of higher prices to consumers.

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Projections of the economic effects of new trade agreements, particularly of their short-term impact, are tentative given the high level of uncertainty that persists regarding trade policy and global growth. In this sense, rising protectionism across the world and within the North American region is one of the main risks confronting the global economy.

In particular, there is uncertainty regarding the extent of the distortions that measures such as tariffs and non-tariff barriers may pose for global trade, supply chains, and the international organization of productive processes. There is also uncertainty about the effects that tariffs and the deterioration in international trade conditions could have on the global economy and investment in the short and medium terms.

Finally, over a longer horizon, greater barriers to trade could lead to a reconfiguration of global value chains to the detriment of aggregate productivity as manufacturing moves away from the efficient allocation of the production of goods and services.

USMCA Auto Sector Effect

USMCA is more restrictive in some respects than NAFTA, particularly in the automotive sector. Under USMCA, the value of regionally sourced content has increased significantly. Additionally, there are new restrictions regarding the origin of steel, aluminum, and vehicle parts used in the production process and new requirements governing labor value content and the wages paid.

Specifically, USMCA stipulates several notable changes in vehicle production. The North American share of the value of automobiles and light trucks produced increases from 62.5 percent under NAFTA to 75 percent under USMCA and from 60 percent to 70 percent for heavy trucks.

Rather than applying NAFTA’s uniform content standard for vehicle parts, USMCA sets separate content requirements (the percentage that must be produced in North America) for three groups: core parts, such as engines and transmissions, 75 percent; principal parts, like electrical and electronic parts, 70 percent; and complementary parts, which include brake systems and miscellaneous parts, 65 percent.

At least 70 percent of the steel and aluminum used in the manufacture of automobiles and light trucks must originate in the U.S., Canada or Mexico.

Notably, requirements for labor value content were introduced in the updated agreement: 40 percent of the materials for automobiles and 45 percent of the content for light trucks must be produced by regional enterprises that pay workers at least $16 per hour. Since Mexican autoworkers currently earn about $7.30 per hour for auto assembly and $3.40 while making automotive parts, this new provision most directly affects Mexico.[1]

The USMCA requirements could make automotive production less efficient and decrease the competitiveness of the automotive industry across the North American region relative to the rest of the world, our estimates show.[2] Using a quantitative general equilibrium trade model—typically used to study the effects of trade reforms on the industry—we estimate the effects of the new requirements, comparing USMCA with NAFTA.[3]

In the baseline scenario, more restrictive rules-of-origin requirements will increase production costs that, in turn, will imply higher prices, reduced output, and a decrease in consumer surplus in the region (Chart 1, blue bars).[4] Furthermore, at the regional level, spending on the transport equipment sector will shift away from local producers and toward foreign suppliers of these goods.

There are considerable losses of real output in the transportation manufacturing sector, as the whole region will reduce its output in the sector. While all countries in the region are negatively affected, Mexico stands to sustain the biggest loss both in terms of the absolute number of vehicles produced and GDP. The competitiveness of some assembly operations in Texas could be affected since facilities such as Toyota’s truck plant in San Antonio and the General Motors SUV unit in Arlington rely on Mexican parts.

Opting Out of USMCA Trade

It is also possible that the new auto provisions increase the burden of compliance to the point that firms opt out of using the benefits of the USMCA and prefer, instead, to source their inputs from the least-cost country (not necessarily from North America) and pay the most-favored-nation (MFN) tariff when exporting. Such a move would hurt regional suppliers. Thus, even in a mildly disruptive scenario, the increase in the rules of origin may increase regional content at the cost of lower North American competitiveness in the automotive industry. In a heavily disruptive scenario, the tougher rules could actually lead to a reduction in the overall regional content in the sector.

Using our model, we estimate the effects that opting out of USMCA could have on the auto sector by considering an MFN opt-in scenario in which all regional trade in the sector faces MFN tariffs. Our estimates imply that this scenario is harsher than our benchmark USMCA scenario, although not drastically so (Chart 1, orange bars). This suggests the possibility that any further tightening of the rules of origin requirements in the auto sector could create incentives for firms to opt-out of the USMCA as a means of conducting trade within the region.

Trade Diversion to Mexico

Trade conflicts between the U.S. and China have also been a factor behind Mexico’s recent export performance. Electrical and optical equipment, machinery, footwear, and textiles are among the sectors where the U.S. has imposed high tariffs on China and where Mexico competes with China for market share.

Thus, it is natural to believe that trade diversion could boost Mexican exports in some industries. Since the U.S.– China dispute began, China has lost market share in the U.S., and Mexico has recorded gains (Chart 2). Most of the market share that China lost in the U.S. involved goods subject to higher tariffs—the same set of goods in which Mexico achieved its largest gains of market share in U.S. imports (Chart 3).

It is important to note that some of Mexico’s gains were in sectors in which China did not export to the U.S. Thus, it appears that Mexican exports have benefited from trade diversion, though perhaps not as much as some might have initially expected.

Notice that the declining share of Chinese imports in the U.S. has outpaced Mexico’s gains. In fact, the increases that Mexico has achieved due to trade diversion amount to only one-third of what China lost. Thus, trade diversion has benefited other countries too, as the rest of the world acquired a market share in the U.S. In particular, South Korea and Taiwan have also gained a considerable presence in the U.S. import market.

Mexico has gained not only in terms of the market share of U.S. imports. China’s market share losses positively affected Mexico’s manufacturing production in sectors in which China lost the most.

However, even though Mexico has been able to gain some output from trade diversion, this improvement has come at someone else’s expense since trade diversion entails an efficiency loss.

In this case, it seems that U.S. consumers have borne the loss through higher prices of imports. Mexico has realized higher prices for the type of exported goods that would have faced tariffs had they come from China. Prices for those Mexican exports to the U.S. increased relatively more than the export prices of goods unaffected by the tariffs.

While there is evidence suggesting that Mexico has, at the margin, benefited from trade diversion, these “gains” may be short-lived if trade tensions lead to a further slowdown of global economic activity, larger trade distortions, and a breakup of global value chains.

Estimates of a counterfactual scenario in which the U.S.–China trade dispute was persistent suggest that both the U.S. and China would sustain real output losses, while Mexico and Canada would increase production, albeit only marginally. However, prices would be much higher, particularly across North America. These higher prices would reduce the gains from globalization for consumers in the region.

Changing Trade Patterns

The adverse impact on economic activity, trade, and investment flows of an evolving and uncertain global trade environment is not surprising. However, calculating the magnitude of this effect is difficult. Mexico as a key U.S. trade partner is, not surprisingly, subject to the crosscurrents of trade bodog casino tensions between the U.S. and China. These impacts are especially important for Texas, which counts Mexico as its largest trade partner.

Approval of the USMCA, an update to the almost quarter-century-old NAFTA, could by itself change trade. Indeed, costs—especially in the key automotive sector—will rise and tend to make North American products potentially less competitive than they might have been over the longer term, depressing Mexico’s GDP.

However, Mexico stands to gain, albeit in the short term, from trade bodog casino tensions between the U.S. and China and the imposition of retaliatory tariffs that began in 2018. Mexico has been a beneficiary of trade diversion, accounting for a portion of what China previously supplied to the U.S.

The U.S.–China Phase One agreement that called a ceasefire to the dispute and a pledge for further trade talks make calculating the future benefit to Mexico difficult. The impact of disrupting the production of goods and services and the global value chains that they represent could exacerbate any broader economic slowdown, further trimming Mexico’s short-term gains and negatively affecting its trading partners.

Notes

1. For more information, see “NAFTA Briefing: Review of Current NAFTA Proposals and Potential Impacts on the North American Automotive Industry,” by Kristin Dziczek, Michael Schultz, Bernard Swiecki and Yen Chen, Center for Automotive Research, April 2018.
2. Estimates are derived from a model that can be used to analyze different counterfactual scenarios regarding changes in tariffs and trade costs among different countries and sectors based on two main data requirements: sector-level trade elasticities and expenditure shares between countries and sectors. For more information, see “Trade Theory with Numbers: Quantifying the Consequences of Globalization,” by Arnaud Costinot and Andrés Rodríguez-Clare, Handbook of International Economics, Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff editors, 2014, vol. 4, pp. 197–261.
3. To properly interpret the results of this exercise, it is important to keep in mind that it only contemplates the general equilibrium implications of changes to the barriers that shape automotive trade in the region. The shift from NAFTA to USMCA contemplates changes in other sectors that are not considered for the purposes of this exercise but can have important macroeconomic consequences (i.e., reducing uncertainty). In addition, important assumptions were made in order to map regional value content and labor value content requirements into the model. For more information about the modeling results, contact Alfonso Cebreros or Armando Aguirre.
4. See note 2 for details of the methodology used to produce the estimates depicted in Chart 1.

To view the full report at the Federal Bank of Dallas , please click here

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Economies with already strong underlying information technology are proving to be more resilient than those without this infrastructure already in place.  At a recent event, I listened to officials from Cambodia and Kenya explain how their strong digital track records are paying off during the current crisis.

In Cambodia, which had previously established an enabling regulatory environment around digital financial services, citizens were already accustomed to sending and receiving payments digitally, making it possible for the government to add tax functionality on to the pre-existing digital payment platforms. Similarly, in Kenya, citizens’ relative comfort with digital payments led to a recent uptick in the use of its e-tax system. The Kenya Revenue Authority has also been able to rely on its digital systems to obtain real-time data on emergency-related shifts in consumer spending, which helps the agency to predict the impact on revenues.

But the type of digital transformation necessary to get to this level is comparable to moving a boulder to the top of a mountain. It’s a long, arduous process, and it’s possible to lose footing along the way. Many economies, especially developing countries, rely on deeply entrenched systems and fight an uphill battle when it comes to public trust. In fact, many of the world’s lowest-income economies struggle to collect enough taxes to cover basic state functions. Add a global crisis into the mix and these tenuous relationships between taxman and citizen are likely to fall apart.

The current crisis provides an opportune moment to rework revenue strategies to be more digitally driven.  Tax administrations must shift the focus from simply processing taxpayers’ data to proactively improving compliance, policies, and efficiency. Modern revenue strategies will, to a large extent, have to run on digital platforms because they are necessary to effectively pursuing critical policy objectives such as:

• Broadening the tax base. Data-centric approaches can be used to close gaps and take advantage of missed opportunities without necessarily increasing the level of taxation. Such measures include: requiring e-commerce platforms to report sales in order to facilitate the collection of VAT and customs duties; analyzing past tax filings of citizens seeking relief under current stimulus programs to verify compliance; and supporting the collection of property taxes by matching the land registry with the taxpayer file.
• Enhancing transparency and trust. Establishing electronic platforms for tax registration, filing, payment, and dispute resolution make processes clear for citizens, provide assurances that tax payments end up in an actual government account, and reduce the risk of officials abusing their discretion. Implementation of technologies such as the MIT-incubated OPAL (Open Algorithm) provides researches, think tanks, or any citizen the ability to independently analyze tax data without having access to personally identifiable information. This will provide unprecedented transparency.
• Reducing the compliance burden. We know from a survey of 190 economies that it is getting easier for people and businesses to pay taxes. There are now 106 economies using electronic filing systems, double the number in 2004. Digital technology is reducing the time spent on paying taxes as well as the total number of individual payments taxpayers must make each year.
• Improving administrative efficiency. As governments mature in their use of information technology, they will be able to achieve substantial efficiency gains. For countries beginning their digital transformation, AI-enabled data capture of paper-based records can speed up the digitalization and reliability of the data. Others find significant value through the simplification of procedures and matching of filing information with third-party data sets. For more advanced tax administrations, the use of advanced analytics to identify underreporting will be a key value driver. In the current crisis, some administrations are also rethinking their balance between offsite and onsite audits.
• Advancing growth and other policy objectives. As the central depository of citizen data, tax administrations play an increasing role in advancing non-tax related objectives. For example, by using taxpayer data to: verify beneficiaries under cash transfer programs, monitor the consumption of goods with detrimental health impacts (e.g., alcohol and cigarettes), model tax policy responses to curb carbon emissions, identify growth drivers in the economy, detect labor market violations, and ascertain the well-being of vulnerable groups in society.

Progress toward these objectives has been uneven and the World Bank cannot get this “modernization boulder” to the top of the mountain alone. To help countries accelerate digital transformation, we need partners with multidisciplinary expertise who can help pull while we push. To that end, we co-founded the Prosperity Collaborative. This new multi-stakeholder initiative is dedicated to helping countries create better tax systems through innovative technology. Together with EY, New America, MIT and the Boston Global Forum, we are just getting started on a journey to bring tangible benefits to developing countries.  Our current priorities are –

• Developing global solutions to build capacity among developing countries and emerging market to undertake a successful digital transformation of their tax administrations;
• Promoting thought leadership on tax and technology;
• Exploring the creation of a mechanism to identify, prioritize, fund, and implement digital public goods for use by tax administrations;

By bringing these leading organizations together under the banner of the Prosperity Collaborative, we aim to create solutions that are well-targeted and easily replicable across different country contexts. Ultimately, we aim to create digital public goods that can be built once and deployed anywhere.

To view the original World Bank Blog post, please click here

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These models affect millions of people through critical decisions related to credit approval, insurance claims, health interventions, pre-trial release, hiring, firing, and much more. While facial recognition, autonomous weapons, and artificial general intelligence tend to dominate the conversation, the debate on regulating more commonplace applications is equally important.

The new white paper echoes the principles of the earlier AI Ethics Guidelines: non-discrimination, transparency, accountability, privacy, robustness, environmental well-being, and human oversight. This new paper goes beyond many prior AI ethics frameworks to offer specific AI regulatory options. Some of these options would be alterations to existing EU law, such as ensuring product liability law can be applied to AI software and AI-driven services.

More noteworthy, however, is the proposal to consider entirely new requirements on high-risk AI applications. The high-risk categorization is limited to specific use-cases within specific sectors where there are particularly large stakes. The report explicitly names sectors such as transportation, healthcare, energy, employment, and remote biometric identification, but others like financial services could be included.

Within these sectors, only especially impactful AI applications would receive the label “high-risk” and accompanying oversight. So, while a healthcare allocation algorithm may be included, a hospital’s AI-enabled scheduling software would probably not qualify.

The report details a series of possible oversight mechanisms for applications deemed high-risk AI. Some of these would set standards for the use of AI, such as using representational training data and meeting defined levels of model accuracy and robustness. Others require storage of data and documentation, potentially enabling government auditing of AI models. Transparency measures are also under consideration.

These might require reporting to regulatory authorities (e.g. an analysis of bias for protected classes) or directly to consumers affected by the model (e.g. an individualized explanation for their model outcome). Not all these requirements would apply to all high-risk AI, but instead some subset of these mechanisms would be paired with each high-risk application.

In weighing how these mechanisms might work, it’s valuable to contemplate how various interventions might affect prominent instances of AI harms. For instance, would enabling audits slow the proliferation of pseudoscientific hiring software across human resources departments? Would reporting requirements help identify discriminatory patient treatment in healthcare allocation algorithms?

Would a more rigorous testing process of Tesla’s autonomous driving have made them more resistant to the stickers that trick the vehicles into driving at dangerous speeds? These are questions that the EC paper is raising—questions that the U.S. policy-makers should be asking, too. Given a type of algorithm being used for a particular high-risk purpose, what oversight mechanisms might ensure that it functions in a legal and ethical way?

While the EC paper is exploring new requirements, it also makes clear that enforcing extant law is difficult due to the complexity and opacity of AI. It takes specific expertise in programming and statistics bodog poker review to evaluate the fairness and robustness of AI models, which regulatory agencies across the EU may not yet have.

This is very likely an issue in the United States, too. AI models can easily run afoul of many federal requirements, such as the Civil Rights Acts, the Americans with Disabilities Act, the Fair Credit Reporting Act, the Fair Housing Act, and financial modeling regulations. It is not clear that U.S. regulatory agencies are staffed to handle this emerging challenge.

The EC paper notes that investing in its ability to enforce AI safeguards has real advantages for industry, too. The European approach argues that responsible regulation will build public trust in AI, allowing companies to build automated systems without losing the confidence of their customers. Broadly speaking, the EC’s perspective is positive about the emergence of AI as a general-purpose technology.

It presents AI as a powerful tool to improve scientific research, drive economic growth, and make public services more efficient. They seek to attract €20 billion ($21.7 billion USD) in annual funding for AI, some of which would come from expanding EU spending. This effort would also be bolstered by an ambitious strategy to incentivize data sharing and expand access to cloud infrastructure.

To view the full blog, click here.

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The UK is under no illusions as to the cyber threat posed by China. The UK government and critical industry sectors, such as defence, telecommunications and IT, have all been subject to Chinese cyber intrusions designed to steal data on an industrial scale. This was last called out publicly in 2018 by then-foreign secretary, Jeremy Hunt, who described Chinese attacks against UK managed service providers as ‘one of the most significant and widespread cyber intrusions against the UK … uncovered to date’.

Drawing on its own experiences in the cyber domain, the UK will also fully understand that espionage capabilities can quickly become sabotage capabilities – the hack of a network to steal data can quickly become the hack that brings the network down. And the UK knows that China’s intelligence law requires Chinese companies to provide it assistance if asked to do so. The UK’s assessment of the cyber threat posed by China does not differ from that of the US.

2. The UK may have managed the use of Huawei kit in its 3/4G networks, but its use in 5G networks significantly increases the risk of Chinese espionage and sabotage.

Just as 3/4G networks are entangled together today, 5G will be entangled with 3/4G networks. Given that Huawei is already providing kit in the UK’s 3/4G networks, the theoretical ability of the Chinese to access and sabotage the UK mobile network would be little changed even if Huawei kit were not used in the 5G elements of the networks.

3. Even if the risk doesn’t increase from 3/4G to 5G, the UK shouldn’t be using Huawei in any ‘G’ network because the threat of serious cyber espionage cannot be mitigated.

The basic cyber security measures that have been used for 3/4G also apply to 5G, with the proper use of encryption to ensure the confidentiality and integrity of data being a crucial one. Ironically, it remains the case that those with the best chance of reading traffic on anyone’s mobile networks are the companies providing ‘over-the-top’ encrypted applications, as well as whichever government hosts those companies under the terms of their domestic lawful intercept (so in the UK that is overwhelmingly the Silicon Valley companies and the US government).

Increasingly, the UK finds itself unable to read the encrypted traffic between suspected terrorists in London and Manchester without Silicon Valley’s help. The presence of Huawei makes no difference – even if the Chinese government were able to use the Huawei kit to listen in, it would face the same problem as the UK government. Let’s be clear – Google can get to the content of gmail passing over a bit of Huawei kit, but China cannot.

4. Ok, the real risk isn’t about spying, it is about China’s ability to use Huawei kit to sabotage the network.

The provision of kit into UK mobile networks and the interfaces between those networks and the rest of the UK’s telecommunications infrastructure are complex processes. Any kit that Huawei provides into UK networks will be integrated with kit and over networks run by other providers – such as BT, Vodaphone, Virgin Media, EE and others. Those providers have a degree of visibility and control over the various interfaces, with ‘redundancy’ built in – another basic UK requirement being to build redundancy into traffic routing to ensure the network as a whole can survive the loss of a single element (network resilience).

Additionally, many of the components inside Huawei kit are manufactured by other nations, particularly the US – software from Microsoft, microchips from Intel and Qualcom. Removing kit within a complex twenty-first century telecommunications network based simply on the nationality of the kit’s ‘supply chain’ is almost impossible. National ownership of a piece of kit is not the only deciding factor when it comes to ‘ease of interference’. As an illustration, if the US were behind the Stuxnet attack, as alleged, it interfered with the kit of a German company, Siemens.

In short, bringing down a complex modern telecommunications network is not easy, whichever bit of kit within the network you ‘own’. But even if you could, when would you do it? It is effectively a ‘one shot’ capability – if used by China, it would undermine the position of all Chinese companies in the world tech market, effectively handing the market to exclusively non-Chinese companies. China would therefore presumably save the ‘one shot’ for war or near-war, in which case it would need to be sure it would work. As I have outlined above, that is not easy.

The sabotage risk is, in reality, probably far subtler. It is more likely that China might try to insert damaging code via mobile networks remotely and deniably, with the Huawei kit used to facilitate an insertion or exfiltration of code/data into other networks – it is part of a pathway or a small but essential cog in a bigger wheel. Note again, however, that other countries could get into Huawei (or Nokia or Ericsson for that matter) kit remotely to do the same thing.

5. Given that there is a potential sabotage risk, can the UK really isolate the core of its network from Huawei?

5G is a cool technology, providing greater bandwidth, faster speeds, better quality and instant connections. It is this faster, smarter layer that will enable the truly innovative applications that we call the ‘Internet of Things’, for example, self-driving vehicles.

Sitting behind this are various technologies. The use of higher frequencies (ultimately including ‘millimetre waves’) means that the system can carry more information and support more devices (‘smart things’) at the same time (4G uses data at rates of 200–300 megabits per second, while service providers are ultimately looking to get 5G to above 40 and even up to 100 gigabits per second). There are many more and smaller transmitting and receiving antennae, using less power and covering smaller geographic areas – allowing the transmission and receipt of signals simultaneously through multiple antennae.

5G uses a Cloud Radio Access Network, meaning cheaper infrastructure and less maintenance. Unlike current generations, 5G base stations use ‘beamforming’ to detect and locate the user, and only transmit in that direction. 5G uses ‘Full Duplex Mode’ enabled by high-speed switching that can handle simultaneous transmission and receipt. Using all of the above, a 5G network can be ‘sliced’ and dedicated to a specific task (e.g. one part for phones and one part for driverless cars).

So 5G looks complicated and distributed. But it can still be divided into core and non-core. The latter refers to the myriad of small antennae, small cells and base stations distributed on masts, street corners and rooftops creating ‘smart’ environments. But there still has to be a controlling brain – the handful of main data centres at the heart of the network, with there being only two or three more centres needed in a 5G network than in a 3/4G network. That is the core, which can be owned and protected by UK service providers, such as Vodaphone and the like, including if held in the ‘cloud’. That is why the UK thinks it might be able to manage the overall risk by restricting Huawei kit to the ‘non-core’ network.

6. But isn’t Huawei kit rubbish anyway?

Perhaps the single-most important reason why Huawei 5G kit seems to outperform its rivals is the amount it has invested in R&D, and its deployment support is very good. The UK’s National Cyber Security Centre has, however, been very critical of Huawei’s coding. Nonetheless, kit can still perform well even when the underlying coding is a mess, meaning that it is not configured in a uniform way and is therefore very ‘buggy’, like Huawei’s. The presence of bugs in software is ‘normal business’ – they are not back doors in themselves, but they can be used to create back doors.

An international standard that set how coding is done would have reduced the number and type of bugs, and, therefore, made the kit inherently more secure. This is a crucial point: the international community should have baked security standards into the design of 5G networks from the outset, rather than now trying to retrofit security measures by means of, for example, the core/non-core debate.

This is the key lesson from the current Huawei saga for future generations of critical technology, including Artificial Intelligence. If we did not do enough to establish the right standards for 5G, we should now start developing the best standards for the 6G that we will be installing in a decade.

To view the full blog, click here.

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“The numerous blockchain networks and DLT platforms will help realize the potential of digital transformation to drive greater economic inclusion. The International Chamber of Commerce (ICC) together with its partners, as neutral conveners of all trade stakeholders across the world, aims at connecting and coordinating these disparate groups in order to accelerate efforts to digitalize trade” said David Bischof, Deputy Director, Finance for Development, International Chamber of Commerce.

“Having a constant need to know all developments and involved parties, this report is an indispensable tool for the entire ecosystem to keep track and align actions.” Bischof added.

Reality Check

We’re living through exciting times. While international trade in goods has seen little innovation since the invention of the container in the 50s, the tedious, labour- and paper-intensive processes required to ship around the world could well become a story of the past thanks to the advent of new technologies, particularly distributed ledger technology (DLT) – colloquially termed “blockchain”. 

Rarely has a technology spurred so much hype and hope amongst the trade and trade finance community. Not without reason: The possibilities that blockchain unlocks to track transactions and exchange assets in real-time, in a trusted and highly secure environment using peer-to-peer validation and networks makes it an appealing tool to remove many of the inefficiencies that hinder one of the oldest forms of traditional finance today.

Over the past few years a myriad of projects have been launched to enhance processes related to trade finance, to digitalize trade documentation, and to reduce inefficiencies in transportation and logistics. Some take the form of multi-player consortia and networks, others are building a fabric layer to interconnect these different projects, and others are built to digitize particular aspects of the trade and supply chain.

These international trade actors are changing fast, but how many of these initiatives have moved beyond a proof-of-concept? What are the challenges that these new actors now face as we go past the trough of disillusionment and exploratory phase of DLT in trade?

Building on the WTO publication “Can Blockchain Revolutionize International Trade?” authored by Emmanuelle Ganne and TFG’s white paper “Blockchain and Trade Finance”, this study provides an overview of the main projects underway in trade, with a focus on trade finance, shipping, and the digitalization of trade documents, and assesses their stages of maturity. Based on a survey of more than 200 actors in the field, bodog casino it analyses the key challenges that companies involved in blockchain projects are facing and discusses actions that may need to be taken to allow the technology to truly transform international trade. After years of hype around blockchain, the time has come for a reality check.

To access the original source: Click here

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Digital data can be recorded, stored, compressed or transferred without any loss of information and quality. The enhancement of these characteristics has been essential for the development of computing, to the point that the term digital has entered into everyday language to generically refer to computer science applications. The development of ever more sophisticated algorithms, combining this data through calculation, makes it easier to solve problems previously considered as too complex.

The continuously improving power of microprocessors is reducing calculation times. The implementation of common protocols to easily exchange data between computers is redefining the concept of connectivity between people. Information, commands and stimuli are circulating in ever greater numbers and dramatically changing how complex systems interact and operate.

Digital technology: a political issue

Therefore, the trend of long-distance communication, which started with writing and continued with the printing press, telegraph, telephone and radio, carries on.

The digital revolution is dramatically changing large areas of human activity. It is shaping globalization by changing the distances between people. Transport, logistics, energy distribution, international finance and critical infrastructure management systems could not function without its applications. The volume of email exchanges is also impressive: 44.7 billion SMS and MMS messages were sent in France in the first quarter of 2018. As of 12 August 2019, more than 45,584 billion emails had been shared worldwide since the beginning of the year.

In the military field, the most advanced armies have integrated battlefield digitalization into their thinking. Military headquarters operate in a more decentralized way, taking advantage of the resources provided by computerization, materializing the advent of a “revolution in military matters”.

From a cultural point of view, games are played on a network. The most talented players earn their living by participating in media tournaments. Special effects are pervading cinema screens, bringing artificial universes to life. A digital culture is emerging.

Digital technology is at the heart of economic, military and cultural issues. It has entered into the everyday life of all people connected to the Internet worldwide. It provides resources in terms of wealth, power, control of society and privacy. For example, Denmark, which is aware of these issues, appointed a Tech Ambassador in 2017. It is legitimate to talk about digital power.
What is power?

Defining the concept of power is a challenge. Common sense accepts that “power” on the international stage is the equivalent of “authority” within societies. However, such an understanding is of limited use. The national and international stages operate under different rules. Authors seeking to understand it acknowledge that it is one of the most controversial terms in international relations.

However, two major themes regularly recur in discussions. The first attempts to make this concept operative. If power exists, it must be possible to define its components and assess them, to measure them in order to act rationally. In this context, power has long been reduced by the realist school to geographical location and to the sum of military, demographic or economic resources.

The most intangible components, such as national pride, the quality of staff and policy, could also count. This accountable and analytical approach, however, is criticized insofar as it only reveals the potential of power. If a state actor does not combine them effectively, it does not guarantee any results. The Soviet Union had many of these advantages, but collapsed without fighting.

Another theme often recurs in discussions on the nature of power. Power is what decides the outcome of the interaction between two state entities or actors in the international system. It no longer refers to a potential, but “to taking action”. In a seminal article, Robert Dahl defines it as: “A has power over B to the extent that A can get B to do something that B would not have otherwise done”.

Power restricts, but not necessarily in a violent way. It can be exercised through seduction, rather than by the brute imposition of will. Finally, power corresponds to an actor’s ability to change the behavior of other actors on the international stage in a favorable direction.

What is digital power?

How can we describe digital power, sometimes called cyberpower, in this context? We will consider digital power as any actor’s ability to exploit digital data to help change the behavior of other actors on the international stage and to achieve its own ends.
It extends beyond the conventional state framework and reconfigures the standard categories, since all connected actors are theoretically likely to have a part in it.

Furthermore, the sources of digital power lie in the exploitation of a synthetic environment and data. This study aims to understand how “intangible” power manages to influence events in the real world and to describe its potential, its applications, and its restrictions.

Digital power transforms the real world through enhancing cyberspace’s network properties (1) and new practices of domination that are imposed on it (2). Its components can be deduced from this (3). However, it is likely that its exercise will be changed in the future through a more assertive, proactive approach by actors in the real world (4). Finally, it is like a kaleidoscope, with several aspects whose coordination sometimes generates considerable tension.

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The 4IR will affect how companies produce goods and services and what they will produce. Based partly on interviews with Swedish industrial companies, we have identified the following five major production trends: i) automation of physical and digital processes (eventually possibly resulting in the spreading out of production where computers make the decisions), ii) a move towards mass customisation, iii) accelerated servicification, iv) increased specialisation, and v) disintegration of global value chains (GVCs) and production in ecosystems. The technologies will – in turn – affect trade in the following three ways:

1. Improve trade logistics and lower transaction costs.
2. Change the actual content of what firms trade – moving from goods to services and data.
3. Change production processes and the location of production. Technologies can lead to automation and, in turn, the possibility of dispersed, self-orchestrated production. The impact on trade is likely to be significant.

First, moving production closer to customers to serve local markets will lead to less measured trade. Second, the GVC setup will change when companies no longer produce their goods in one place. Beyond being close to customers, companies want to be close to “hubs”, i.e., centres of coopetition, innovation and collaboration. Again, this will affect the GVC set-up. Third, trade flows will change since reorganised GVCs lead to changed movements of the inputs and regional sourcing. Fourth, trade participation will change, for both for countries and firms. For countries, trade participation will change as new GVC set-ups will make the receiving countries importers of inputs and exporters of the product now produced in that same country. For companies, often SMEs, new technologies allow them to enter the supply chain and participate in production.

The technological opportunities of the 4IR will lower the threshold to enter trade, especially for SMEs. Many SMEs have already stepped over the threshold and more will follow. However, taking the step is generally more difficult for SMEs. One central reason is that the benefits of automation have to be even more certain to small companies. Uncertainty about which direction the 4IR will take is a barrier for companies entering the 4IR.

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“The race to 5G is on and America must win,” President Donald Trump said in April. For political purposes, that “race” has been defined as which nation gets 5G built first. It is the wrong measurement.

 

We must “fire first effectively” in our deployment of 5G. Borrowing on a philosophy Admiral Arleigh Burke coined in World War II: Speed is important, but speed without a good targeting solution can be disastrous.^[1]

5G will be a physical overhaul of our essential networks that will have decades-long impact. Because 5G is the conversion to a mostly all-software network, future upgrades will be software updates much like the current upgrades to your smartphone. Because of the cyber vulnerabilities of software, the tougher part of the real 5G “race” is to retool how we secure the most important network of the 21^st century and the ecosystem of devices and applications that sprout from that network.

Never have the essential networks and services that define our lives, our economy, and our national security had so many participants, each reliant on the other—and none of which have the final responsibility for cybersecurity. The adage “what’s everybody’s business is nobody’s business” has never been more appropriate—and dangerous—than in the quest for 5G cybersecurity.

“As we pursue the connected future, however, we must place equivalent—if not greater—focus on the security of those connections, devices, and applications.”

The new capabilities made possible by new applications riding 5G networks hold tremendous promise. As we pursue the connected future, however, we must place equivalent—if not greater—focus on the security of those connections, devices, and applications. To build 5G on top of a weak cybersecurity foundation is to build on sand. This is not just a matter of the safety of network users, it is a matter of national security.

HYPERFOCUS ON HUAWEI

Effective progress toward achieving minimally satisfactory 5G cyber risk outcomes is compromised by a hyperfocus on legitimate concerns regarding Huawei equipment in U.S. networks. While the Trump administration has continued an Obama-era priority of keeping Huawei and ZTE out of domestic networks, it is only one of the many important 5G risk factors. The hyperbolic rhetoric surrounding the Chinese equipment issues is drowning out what should be a strong national focus on the full breadth of cybersecurity risk factors facing 5G.

The purpose of this paper is to move beyond the Huawei infrastructure issue to review some of the issues that the furor over Huawei has masked. Policy leaders should be conducting a more balanced risk assessment, with a broader focus on vulnerabilities, bodog poker review threat probabilities, and impact drivers of the cyber risk equation. This should be followed by an honest evaluation of the oversight necessary to assure that the promise of 5G is not overcome by cyber vulnerabilities, which result from hasty deployments that fail to sufficiently invest in cyber risk mitigation.

Such a review of 5G cyber threat mitigation should focus on the responsibilities of both 5G businesses and government. This should include a review of whether current market-based measures and motivations can address 5G cyber risk factors and where they fall short, the proper role of targeted government intervention in an era of rapid technological change. The time to address these issues is now, before we become dependent on insecure 5G services with no plan for how we sustain cyber readiness for the larger 5G ecosystem.

The after-the-fact cost of missing a proactive 5G cybersecurity opportunity will be much greater than the cost of cyber diligence up front. The NotPetya attack in 2017 caused $10 billion in corporate losses. The combined losses at Merck, Maersk, and FedEx alone exceeded $1 billion. 5G networks did not exist at that time, of course, but the attack illustrates the high cost of such incursions, and it pales in comparison to an attack that would result in human injury or loss of life. We need to establish the conditions by which risk-informed cybersecurity investment up front is smart business for all 5G participants.

China is a threat even when there is not Huawei equipment in our networks. From the successful exfiltration of highly sensitive security clearance data in the Office of Personnel Management breach commonly attributed to China, to the ongoing China-linked threat actor campaign against managed service providers, many of China’s most successful attacks have taken advantage of vulnerabilities in non-Chinese applications and hardware and poor cyber hygiene. None of this goes away with the ban on Huawei. We cannot allow the headline-grabbing focus on Chinese network equipment to lull us into a false sense of cybersecurity. In a world of interconnected networks, devices, and applications, every activity is a potential attack vector. This vulnerability is only heightened by the nature of 5G and its highly desirable attributes. The world’s hackers (good and bad) are already turning to the 5G ecosystem, as the just concluded DEFCON 2019 (the annual ethical “hacker Olympics”) illustrated. The targets of this year’s hacker villages included key parts of the 5G ecosystem such as: aviation, automobiles, infrastructure control systems, privacy, retail call centers and help desks, hardware in general, drones, IoT, and voting machines.

5G EXPANDS CYBER RISKS

There are five ways in which 5G networks are more vulnerable to cyberattacks than their predecessors:

1. The network has moved away from centralized, hardware-based switching to distributed, software-defined digital routing. Previous networks were hub-and-spoke designs in which everything came to hardware choke points where cyber hygiene could be practiced. In the 5G software defined network, however, that activity is pushed outward to a web of digital routers throughout the network, thus denying the potential for chokepoint inspection and control.
2. 5G further complicates its cyber vulnerability by virtualizing in software higher-level network functions formerly performed by physical appliances. These activities are based on the common language of Internet Protocol and well-known operating systems. Whether used by nation-states or criminal actors, these standardized building block protocols and systems have proven to be valuable tools for those seeking to do ill.
3. Even if it were possible to lock down the software vulnerabilities within the network, the network is also being managed by software—often early generation artificial intelligence—that itself can be vulnerable. An attacker that gains control of the software managing the networks can also control the network.
4. The dramatic expansion of bandwidth that makes 5G possible creates additional avenues of attack. Physically, low-cost, short range, small-cell antennas deployed throughout urban areas become new hard targets. Functionally, these cell sites will use 5G’s Dynamic Spectrum Sharing capability in which multiple streams of information share the bandwidth in so-called “slices”—each slice with its own varying degree of cyber risk. When software allows the functions of the network to shift dynamically, cyber protection must also be dynamic rather than relying on a uniform lowest common denominator solution.
5. Finally, of course, is the vulnerability created by attaching tens of billions of hackable smart devices (actually, little computers) to the network colloquially referred to as IoT. Plans are underway for a diverse and seemingly inexhaustible list of IoT-enabled activities, ranging from public safety things, to battlefield things, to medical things, to transportation things—all of which are both wonderful and uniquely vulnerable. In July, for instance, Microsoft reported that Russian hackers had penetrated run-of-the-mill IoT devices to gain access to networks. From there, hackers discovered further insecure IoT devices into which they could plant exploitation software.

Fifth-generation networks thus create a greatly expanded, multidimensional cyberattack vulnerability. It is this redefined nature of networks—a new network “ecosystem of ecosystems”—that requires a similarly redefined cyber strategy. The network, device, and applications companies are aware of the vulnerabilities and many are making, no doubt, what they feel are good faith efforts to resolve the issues. The purpose of this paper is to propose a basic set of steps toward cyber sufficiency. It is our assertion that “what got us here won’t get us there.”

5G service providers are the first ones to tell us that 5G will underpin radical and beneficial transformation in what we can do and how we manage our affairs. At the same time, these companies have publicly worried about their ability to address the totality of the cyber threat and have described the future challenge in disturbingly blunt terms. The president’s National Security Telecommunications Advisory Committee (NSTAC)—composed of leaders in the telecommunications industry—told him in November, “The cybersecurity threat now poses an existential threat to the future of the [n]ation.”

The nature of 5G networks exacerbates the cybersecurity threat. Across the country, consumers, companies, and cities seeking to use 5G are ill-equipped to assess, let alone address, its threats. Placing the security burden on the user is an unrealistic expectation, yet it is a major tenet of present cybersecurity activities. Looking to the cybersecurity roles of the multitude of companies in the 5G “ecosystem of ecosystems” reveals an undefined mush. Our present trajectory will not close the cyber gap as 5G greatly expands both the number of connected devices and the categories of activities relying on 5G. This general dissonance is further exacerbated by positioning Chinese technological infection of U.S. critical infrastructure as the essential cyber challenge before us. The truth is that it’s just one of many.

WHAT HAVE WE LEARNED THUS FAR?

5G has challenged our traditional assumptions about network security and the security of the devices and applications that attach to that network. As officials of the Federal Communications Commission (FCC), the authors struggled to deal with these challenges only to be confronted by:

• Industrial-era procedural laws that make rulemaking activity cumbersome and non-rulemaking activity less than optimal.
• The incentive of bad actors to overcome any solution that is typically greater than the incentive to maintain the protection.
• Industry stakeholder fear of exposing their internally identified risk factors at precisely the time when sharing information about attacks would be of greatest value for a collective defense.

At the same time, those who know the networks the best—the network operators—exist under business structures that are not optimal for effective risk reduction. As an FCC white paper concluded three years ago:

As private actors, ISPs (internet service providers, such as 5G networks) operate in economic environments that pressure against investments that do not contribute to profit. Protective action taken by one ISP can be undermined by the failure of other ISPs to take similar actions. This weakens the incentive of all ISPs to invest in such protections. Cyber accountability therefore requires a combination of market-based incentives and appropriate regulatory oversight where the market does not, or cannot, do the job efficiently.

The FCC report’s finding—that market forces alone would not address society’s cyber risk interests—highlighted the ISPs over which the agency had primary jurisdiction. The report additionally examined the larger ecosystem and concluded that the motivation to solve the problem generally gets worse when consumers do not link a purchasing decision with a cyber risk outcome. This, unfortunately, is all too often the case, as service providers as well as device and application vendors do not make meaningful security differentiators public and don’t compete on any verifiable security indicators.

“None of this suggests that we suspend the march to the benefits of 5G. It does, however, suggest that our status quo approach to 5G should be challenged.”

In 2016, for instance, hackers shut down major portions of the internet by taking control of millions of low-cost chips in the motherboards of video security cameras and digital video recorders. That the internet could be attacked this way reflected the reality of digital supply chains: Because consumers didn’t consider cybersecurity in their purchase decisions of low-cost connected devices (they were the means, not the target of the attack), retailers didn’t prioritize security in their decisions of what to stock. As a result, manufacturers didn’t emphasize cyber in the components they purchased and thus chip and motherboard manufacturers did not include cyber protections in their product. None of companies defined a role for themselves for sustaining post-purchase product cyber readiness and, by and large, that’s still the case.

New industry verticals are bringing 5G-enabled capabilities to a market where good faith efforts are insufficient. There is no evidence that the business priorities of the suppliers of devices and applications are any different than those attributed to network operators in the FCC report. A 2018 report by the Trump administration’s Council of Economic Advisers, for instance, warned of, “underinvestment in cybersecurity by the private sector relative to the socially optimal level of investment.”

None of this suggests that we suspend the march to the benefits of 5G. It does, however, suggest that our status quo approach to 5G should be challenged. Continuation of corporate and governmental policies that are not keeping up with today’s cyber risk do not bode well for a volumetric expansion of the attackable network and data surface of 5G networks. There is a crying need for coordinated efforts to achieve targeted expectations.

TWO KEYS TO WINNING THE REAL “5G RACE”

The real “5G race” is whether the most important network of the 21^st century will be sufficiently secure to realize its technological promises. Yes, speedy implementation is important, but security is paramount. To answer that overriding question requires new efforts by both business and government and a new relationship between the two.

The recommendations that follow are both important and not without cost. In normal times, such suggestions might be judged too much of a departure from traditional practices. These are not normal times, however. The outlook for a future that relies on 5G and other new digital pathways is cyber-defined. Our nation has moved into a new era of non-kinetic warfare and criminal activity by nation-states and their surrogates. This new reality justifies the following corporate and governmental actions.

Key #1: Companies must recognize and be held responsible for a new cyber duty of care

The first of this two-part proposal is the establishment of a rewards-based (as opposed to penalty-driven) incentive for companies to adhere to a “cyber duty of care.” Traditionally, common law established that those who provide products and services have a duty of care to identify and mitigate potential harms that could result. There needs to be a new corporate culture in which cyber risk is treated as an essential corporate duty and rewarded with appropriate incentives, whether in monetary, regulatory, or other forms. Such incentives would require adherence to a standard of cyber hygiene which, if met, would entitle the company to be treated differently than other non-complying entities. Such a cyber duty of bodog casino care includes the following:

• Reversing chronic underinvestment in cyber risk reduction

Proactive cyber investment today is the exception rather than the rule. For public companies, the Securities and Exchange Commission (SEC) and others are driving change from the corporate board-level on down through management. A favorite entrance point for cyberattacks, however, remains the smaller companies, many of which are outside of the scope of these efforts. Unfortunately, the SEC’s efforts impact only the less than 10% of American companies that are publicly owned. At the very least, where companies have a role in critical infrastructure or provide a product or service that, if attacked, could imperil public safety, there must be the expectation that cybersecurity risks are being addressed proactively.^[2]

• Implementation of machine learning and artificial intelligence protection

Cyberattacks on 5G will be software attacks; they must be countered with software protections. During a Brookings-convened discussion on 5G cybersecurity, one participant observed, “We’re fighting a software fight with people” whereas the attackers are machines. Such an approach was like “looking through soda straws at separate, discrete portions of the environment” at a time when a holistic approach and consistent visibility across the entire environment is needed. The speed and breadth of computer-driven cyberattacks requires the speed and breadth of computer-driven protections at all levels of the supply chain.

• Shifting from lag indicators of cyber-preparedness (post-attack) to leading indicators

A 2018 White House report found a “pervasive” underreporting of cyber events that “hampers the ability of all actors to respond effectively and immediately.” The 5G cyber realm needs to adopt leading indicator methodology to communicate cyber-preparedness between interdependent commercial companies and with government entities charged with oversight responsibilities. There are a number of good examples to pull from. Shared cyber risk assessments are increasingly a best practice for cyber-mature companies and their supply chain. Several accounting and insurance firms have developed lead metrics to inform cyber risk reduction investments and underwrite policies. The Department of Homeland Security has resiliency self-assessment standards to motivate long-term community disaster preparedness improvement.^[3] Such a model should be extended to the 5G cyber realm in order to shift oversight from lag indicators to lead indicators.

A regular program of engagement with boards and regulators using cybersecurity lead indicators will build trust, accelerate closing the 5G readiness gap and lead towards more constructive outcomes when cyber attackers do succeed. Underreporting of lag indicators, as highlighted in the 2018 White House report should be addressed, but with the primary purpose of closing the feedback loop, improving the quality of lead measures and the investment decision process they inform.

• Cybersecurity starts with the 5G networks themselves

While many of the large network providers building 5G are committing meaningful resources to cyber, small- and medium-sized wireless ISPs serving rural communities have been hard pressed to rationalize a robust cybersecurity program. Some of these companies have fewer than 10 employees and can’t afford a dedicated cyber security officer or a 24/7 cyber security operations center. Still, they will be offering 5G services and interconnecting with 5G networks. About one-third of these companies have ignored government warnings about the use of Huawei equipment and are now petitioning Congress to pay for their poor decisions and pay to replace the non-Chinese equipment. Any replacement must include the expectation that the companies will establish sufficient cybersecurity processes that sustain protections. All the networks that deliver 5G—whether big brand names, small local companies, wireless ISPs, or municipal broadband providers—must have proactive cyber protection programs.

• Insert security into the development and operations cycle

For many application developers, a core agile development tenet has been sprinting to deploy a minimum viable product, accepting risk, and committing to later providing consumer-feedback-driven upgrades once the product gains a following. Software companies and those providing innovative, software-based products and services are beginning to insert cybersecurity in the process as a design, deployment, and sustainment consideration for every new project. Such security by design should be a minimum duty of care across the commercial space for innovations in the emerging 5G environment.

• Best practices

The National Institute for Standards and Technology (NIST) Cybersecurity Framework has established five areas for best practice cybersecurity management that could become the basis of industry best practices: Identify, protect, detect, respond, and recover. For instance, NIST’s “identify” initiative focuses on determination of a company’s cyber universe, threats, and vulnerabilities in order to identify cyber risk reduction investments. While not limited only to the NIST framework, Congress should establish a cybersecurity standard of expected performance and accompanying incentives for its adoption by companies. While industry-developed best practices are a step in the right direction, they are only as strong as the weakest link in the industry and continue to place the burden on poorly informed consumers to know whether the best practices are being fulfilled. The Consumer Technology Association (CTA)—representing the $377 billion U.S. consumer technology industry—helped produce an anti-botnet guide that outlines best practices for device manufactures, but there is no way for a consumer to easily tell if it’s being followed.

“While industry-developed best practices are a step in the right direction, they are only as strong as the weakest link in the industry.”

Unfortunately, publication of optional cybersecurity best practices without full industry buy-in may be an attempt at responsible behavior and good public relations, but often do little to change the cyber risk landscape. While CTA has additionally published a useful buyer’s guide to explain cyber risk issues and improve household cyber hygiene, one wonders how many consumers of low-cost network connected technologies even know of its existence. Shifting cyber risk burdens to poorly informed consumers has limited utility. The 5G commercial sector needs to acknowledge the limits of consumer-based actions, own the residual risk, and work together with government oversight to assign cross-sector mitigation responsibilities.

Key #2: Government must establish a new cyber regulatory paradigm to reflect the new realities

Current procedural rules for government agencies were developed in an industrial environment in which innovation and change—let alone security threats—developed more slowly. The fast pace of digital innovation and threats requires a new approach to the business-government relationship.

• More effective regulatory cyber relationships with those regulated

Cybersecurity is hard, and we should not pretend otherwise. As presently structured, government is not in a good position to get ahead of the threat and determine detailed standards or compliance measures where the technology and adversary’s activities change so rapidly. A new cybersecurity regulatory paradigm should be developed that seeks to de-escalate the adversarial relationship that can develop between regulators and the companies they oversee. This would replace detailed compliance instructions left over from the industrial era with regular and fulsome cybersecurity engagements between the regulators and the providers at greatest risk as determined by criticality, scale (impact), or demonstrated problems (vulnerabilities) built around the cyber duty of care. It would be designed to reward sectors where participants have organized and are clearly investing ahead of failure to address risk factors.

Conversely, where sectors are ignoring cyber risk factors, graduated regulatory incentives can change corporate risk calculus to address consumer and community concerns. These activities would be afforded confidentiality and not be used by themselves to discover enforcement violations, but instead to help both regulators and the regulated better spot trends, best practices, and collectively and systematically improve their sector’s approach to cyber risk. DHS can have a supporting role for this, but at the end of the day, the balance between security, innovation, corporate means, and market factors is inherently regulatory. Absent the ability to impose a decision, government involvement can only be hortatory.

• Recognition of marketplace shortcomings

Economic forces drive corporate behavior. Of course, there are bottom-line-affecting costs associated with cybersecurity. Even when such costs are voluntarily incurred, however, their benefits can be undone by another company that doesn’t make the effort. The first of this paper’s two recommendations suggests what companies can do to exercise their cyber duty of care. History has shown, however, that the carrot accompanying such efforts often needs the persuasion of a standby stick. This is only fair to those companies that step up to their responsibility and should not be penalized in the marketplace by those that do not step up. A rewards-based policy would amplify the value of cyber duty of care participation, especially when others fall short. It would also provide forward-looking incentive for risk reduction and a more useful feedback loop when breaches invariably occur.

• Consumer transparency

Consumers have little awareness and no insight with which to make an informed market decision. The situation is analogous to the forces that resulted in the establishment of nutritional labeling for foods. Consumers should be given the tools with which to make informed decisions. “Nutritional labeling” about cyber risks or a cyber version of Underwriters Laboratories’ self-certification will help focus the attention of all parties on its importance.

• Inspection and certification of connected devices

For years, the FCC has overseen a program to certify that radio-signal-emitting devices do not interfere with authorized use of the nation’s airwaves. Whether cellphones, baby monitors, electronic power supplies, or Tickle Me Elmo, the FCC assures the design and assembly of transmitting devices are within standards. The industry then organizes underneath that construct to self-certify devices in a cost-effective means baked into their production and distribution processes. At the time of the 2016 DYN attack that took control of millions of video cameras, the authors proposed a similar regimen to review the cybersecurity of connected devices. If we protect our radio networks from harmful equipment, why do we not protect our 5G networks from cyber-vulnerable equipment?

• Contracts aren’t enough

Both the executive and legislative branches have focused on using government acquisition standards and pathfinder contracts to impose cybersecurity requirements where government contracts can compel commercial actions. This is an important, proven practice, but it can only go so far. Federal acquisition policies do not reach non-government suppliers that in an interconnected network can wreak havoc by simply connecting to the network. The majority of small and medium 5G network providers are not bound by any of these government contracts.

• Stimulate closure of 5G supply chain gaps

For years government review of mergers and acquisitions has typically failed to appreciate the potential negative impact on critical supply chains. Moving companies and processes offshore or to joint ventures with foreign ownership/control has created wholesale gaps in the supply of crucial 5G components and the absence of domestic procurement options. Country of origin/ownership concerns must become relevant to both the corporate calculus that led to offshoring purchase decisions as well as to the market conditions that led to the destruction of a national capability in the first place. 5G supply chain market analysis must be continuous with regular engagement between regulators, industry, and the executive and legislative branches to properly incentivize globally competitive domestic sourcing alternatives.

• Re-engage with international bodies

At present, the standards setting process for 5G is governed by the 3^rd Generation Partnership Project (3GPP), an industry group that makes decisions by consensus based on input from its members, including Chinese 5G equipment companies. (Huawei reportedly made the most contributions to the 5G standard). The Obama FCC engaged directly with 3GPP to identify public safety and cybersecurity risk considerations applicable to the U.S. market. It additionally opened a notice of inquiry to ask the nation’s best technology brains how to implement cybersecurity risk reduction as part of the development and deployment cycle. The move was opposed by some industry associations Bodog Poker and the Republican commissioners. Shortly after the beginning of the Trump administration, the new FCC cancelled the Obama FCC’s cyber initiatives.

There needs to be informed third-party oversight early in the 5G industry’s design and deployment cycle in order to prioritize cyber security. The nation, our communities and our citizens should—through their government—have some degree of agency in the process. The FCC and Commerce Department should participate in 3GPP and the U.S. feeder group as observer stakeholders. This will allow for earlier issue identification and the opportunity to submit concerns, without changing the basic governance of standards setting. The representatives of American citizens should have the option to escalate engagement on matters of national security and public safety concern.

CONCLUSION

It is an amazing turn of events when the U.S. Senate, currently led by Republicans, feels it necessary to introduce legislation instructing the Trump administration “to develop a strategy to ensure the security of next generation mobile telecommunications systems and infrastructure.” The 5G cybersecurity threat is a whole-of-the-nation peril. We should not be lulled into complacency because the newness of the network has masked the threat. We must not confuse 5G cybersecurity with international trade policy. Congress should not have to pass legislation instructing the Trump administration to act on 5G cybersecurity. The whole-of-the-nation peril requires a whole-of-the-economy and whole-of-the-government response built around the realities of the information age, not formulaic laissez faire political philosophy or the structures of the industrial age.

“People are going to be put at risk and possibly die as we increasingly connect life sustaining devices to the internet,” was the stark warning from one of the experts participating in a Brookings roundtable on 5G cybersecurity. This cold reality is because the internet’s connection to people and the things on which they depend will increasingly be through vulnerable 5G networks. It is an exposure that is exacerbated by a cyber cold war simmering below the surface of consumer consciousness.

Early generation cyberattacks targeted intellectual property, extortion, and hacked databases. Today, the stakes are even higher as nation-state actors and their proxies gain footholds in our nation’s critical infrastructure to create attack platforms lying in wait. Any rational risk-based assessment reveals that the favored adversary target is our commercial sector. Companies that provide critical network infrastructure or provide products or services connected to it represent the likely and potentially most dangerous enemy course of action in the ongoing cyber cold war.

“If you’re asking me if I think we’re at war, I think I’d say yes,” the former commandant of the Marine Corps, Gen. Robert Neller, told an audience in February. “We’re at war right now in cyberspace. … They’re pouring over the castle walls every day.” While our adversaries, no doubt, see positive outcomes for high-profile direct attack, they also are perfecting less-risky positive outcomes in a steady pace of low-level attacks intended to erode U.S. public confidence in our cyber critical infrastructure and the digital economy it underpins. The low-intensity cyber war is already ongoing as our adversaries risk very little in these attacks and stand to gain much.

Into this attack environment has come a software-based network built on a distributed architecture. With its software operations per se vulnerable, and a distributed topology that precludes the kind of centralized chokepoint afforded by earlier networks, 5G networks will be an invitation to attacks. Given that the cyber threat to the nation comes through commercial networks, devices, and applications, our 5G cyber focus must begin with the responsibilities of those companies involved in the new network, its devices, and applications. The cyber duty of care for those involved in 5G services is the beginning of such proactive responsibility.

“Yes, the “race” to 5G is on—but it is a race to secure our nation, our economy, and our citizens.”

At the same time, the federal government has its own responsibility to create incentives for 5G companies to focus on the cyber vulnerabilities they create. This is especially the case when there may be a corporate or marketplace lack of motivation to prioritize a maximum cyber effort. As outlined in this paper, this will necessitate replacing the rigid industrial-era relationship between government and business with more innovative and agile means of dealing with the shared problem.

Yes, the “race” to 5G is on—but it is a race to secure our nation, our economy, and our citizens.

The moment is now for a bipartisan call to action to not just address the current 5G exposures, but also to address the structural shortfalls that have allowed the cyber readiness gap to continue to grow. What got us here won’t get us to a secure 5G-enabled future.

Tom Wheeler was the 31^st chair of the FCC from 2013 to 2017. Currently, he is a visiting fellow at the Brookings Institution. Rear Admiral David Simpson, USN (Ret.), was chief of the FCC’s Public Safety and Homeland Security Bureau during the same period. Currently, he is a professor at Virginia Tech’s Pamplin College of Business.

 

Report Produced by Center for Technology Innovation

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